Bahrain needs wise investments: expert

Middle East investment professional Douglas Hansen-Luke argues that financial experts in Bahrain's private sector should decide where the money goes.

Bahrain still hasn't announced how it will spend a $10 billion GCC grant announced in March. Robeco's Middle East chief executive officer Douglas Hansen-Luke argues that financial experts in the private sector should decide where the money goes...

Four months ago, the GCC announced a $20bn, 10-year fund for the development of Bahrain and Oman.

GCC Foreign Ministers' meeting in Riyadh on March 10 delivered the pledge and UAE Foreign Minister Shaikh Abdullah bin Zayed Al Nahyan said each country would receive $10bn over the next decade.

Such a vast sum has the potential to substantially boost Bahrain's growth, employment and stability, but so far little has been heard of when or how this fund will be established.

It is said delays in details emerging are due to concerns about how the money will be spent, or whether Bahrain has sufficient viable projects.

As part of a recent American rescue package, the federal government tendered out the Troubled Asset Relief Programme to asset managers to run.

Back in 1945, the British government and leading banks created the forerunner to today's very successful investment firm 3i. Its mandate was to contribute to rebuilding the post-war economy whilst maintaining commercial discipline.

Germany's KfW Bank was founded in 1948 with the same objective and is now one of the world's safest banks.

Similarly, the $10bn pledged to Bahrain could outsource investment of this money to independent, commercially driven financial experts.

The money could then be spent in Bahrain with local contractors in strategic sectors and future industries, but administered according to best practices and international standards of governance.

It is now time for the local financial community to respond to this opportunity and proactively present the government with options for profitable investments in and with Bahrainis.

The proposed fund represents 50 per cent of Bahrain's gross domestic product (GDP) and, even injected gradually over 10 years, would still account for almost one third to half of new spending at the national level.

On a per capita basis, the fund will invest $10,200 for each and every Bahraini in the country.

If poured quickly into Bahrain without planning, such wealth could easily fuel inflation, adversely impact the balance of payments and leave the majority paying higher prices, while only a few profited.

Allegations of corruption and unfairness would abound and we would be no closer to stability.

To avoid this, the best institutions in the world should be invited to tender for the right to manage this fund - on the condition that they set up a meaningful operation in Bahrain.

Each industry sector could have a sub-fund managed by the best-qualified investment manager.

Bahrain would then not only have the money to develop a diversified economy, but the talent and standards to be world class.

So let us invite the best, most experienced investment brains in the world to address how to profitably develop Bahrain.

There are three advantages to such an approach. Firstly, external managers would provide good corporate governance that - with fewer conflicts of interest - would reduce waste and inefficiency.

Secondly, professional managers would be motivated by profit. Investments would need to achieve a financial return over the long term.

Thirdly, requiring firms to set up an operation in Bahrain would allow the country to re-establish itself as a credible, pan-GCC financial centre.

The market cost of investment managers is usually one to two per cent, plus a share of positive returns at the end of the fund's life.

The government would be able to press for competitive pricing and the cost of the fees would be small compared to the benefits of reduced waste and the 15pc plus returns typical for regional projects.

The process could be supervised by the appropriate government department or by the Bahrain Mumtalakat Holding Company, the well-regarded sovereign wealth fund.

Tamkeen has already structured impressive plans and would be a key partner in ensuring sufficient knowledge sharing and the acceleration of training needed to move in step with localisation.

Alternatives could include a GCC or government-managed investment, or treatment of the fund as aid.

Management by the government could be done, but departments are already stretched and few have any direct experience of investing.

Leaving responsibility with the GCC would have similar problems and would limit Bahrain's say in its own affairs. The ideal would be for the $10bn to be earmarked within the general budget and passed through an appropriate investment vehicle such as Mumtalakat.

Politically motivated or unfair allegations of partiality and corruption could also be more easily made against government departments - rightly or wrongly, external, professional investment managers would be perceived as more neutral.

Aid would be an even worse outcome. Bahrain is one of the world's richest nations and, considering the absence of tax, already has generous welfare provision.

Overall it would be better for Bahrain's future to encourage a spirit of innovation and entrepreneurship rather than encourage its citizens to look to handouts from the state or from the GCC.

If Bahrain were to take the funding as aid then it would be in debt to the rest of the Gulf; in such circumstances Bahrain would be hard-placed to reject offers for prestige projects built by GCC contractors.

Across the economy, incentives would be distorted and once the aid ended, Bahrain would be revealed as uncompetitive.

The government has a duty to all citizens to pursue this opportunity and to ensure that the $10bn is invested wisely. If this money is invested well, then it will generate sustainable income and local employment for years to come.

If the fund is spent without care, then it could lead to a short-term inflationary bubble with no long-term benefit.

Worse, if the fund is spent badly then it will leave the government open to further criticism and allow sectarians to again attack civil society.

Financial institutions should work together with the government to present ideas that are good for their sector, for investors and, most importantly, for the people of Bahrain.